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Friday, April 11, 2014

10/4/2014: The curse of Long-Term Joblessness

This is an unedited version of my Sunday Times column from March 30, 2014

The unemployment crisis has not passed unnoticed in many households. Ours’ is no exception. Back in 2008, for a brief period of time, both of us found ourselves out of jobs. Thankfully, the spell was very short-lived. Then, in 2011, over a couple of months, I was dusting out my CV for unplanned updates. Just a few days ago, I learned that this year I will not be teaching two of the courses I have taught over the recent years. It's part-time unemployment, again, and this time it is down not to the economic crisis, but to the senile EU 'labour protection' laws.

Yet, spared long-term unemployment spells and able to pick up freelance and contract work, our family is a lucky one. In contrast, many in Ireland today find themselves in an entirely different camp.

Per latest statistics, in February 2014, 180,496 individuals were officially in receipt of Live Register supports for longer than 1 year. Inclusive of those long-term unemployed who were engaged in state-run 'activation programmes' there were around 265,500 people who were seeking employment and not finding one for over a year.

Countless more, discouraged by the zero prospect of securing a new job and not eligible or no longer eligible (having run out of benefits and not qualifying for full social welfare due to total family income) for Live Register supports have dropped out of the workforce and/or emigrated. They simply vanished from the official statistics counts. By latest counts, their numbers can range around 250,000; half of these coming from emigrants who left the country between April 2010 and April 2013.

The numbers above starkly contrast with the boisterous claims by the Government that the economy has created some 61,000 new jobs in 2013. Looking deeper into the new jobs claim, there has been a tangible rise in full-time employment of roughly 27,000 in 2013. Which is still a good news, just not good enough to make a serious dent in the long-term unemployment figures.

Officially, year on year, long-term unemployment fell by 20,900 in Q4 2013. Accounting for those in activation programmes, it was down by around 18,200. Live Register numbers are showing even shallower declines. In 12 months through February 2014, total number of unemployment supports recipients fell 30,807. But factoring in the effect of state training programmes, the decline was only 7,364 amongst those on live register for longer than 1 year. Even more worrisome, since Q1 2011 when the current Government took office, through the first two months of 2014, numbers of the long-term recipients of Live Register support are up by 31,352.

Whichever way you look at the figures, the conclusion is brutally obvious: the problem of long-term unemployment is actually getting worse just as the Government and the media are talking about rapid jobs creation. More ominously, with every month passing, those stuck in long-term joblessness lose skills, aptitude and sustain rising psychological stress.

All of this adds up to what economists identify across a number of studies as a long-term or nearly permanent loss of economic and social wellbeing for workers directly impacted by the long-term unemployment.

However, long-term unemployment also impacts many more individuals than the unemployed themselves.

The lifetime declines in career paths and incomes traceable to the long-term unemployment are also found across the groups related to those without the jobs either via family or via job market connections. Researchers in the US, UK, Germany and Denmark have shown that long-term unemployment for one member of the family leads to a reduction in the lifetime income and pensions cover for the entire household. Studies have also linked long-term unemployment of parents to poorer outcomes in education and jobs market performance for their children.

The adverse effects of long-term unemployment also occur much earlier in the out-of-work spell than our statistics allow for. Whilst we consider the unemployment spells of over 1 year to be the benchmark for long-term unemployment, studies from the US and UK show that the adverse effects kick in as early as six months after the job termination. The US-based Urban Institute found that being out of work for a period in excess of six months is "associated with lower well-being among the long-term unemployed, their families, and their communities. Each week out of work means more lost income. The long-term unemployed also tend to earn less once they find new jobs. They tend to be in poorer health and have children with worse academic performance than similar workers who avoided unemployment. Communities with a higher share of long-term unemployed workers also tend to have higher rates of crime and violence."

This is a far cry from the Irish Government rhetoric on the issue of long term unemployment that paints the picture of relatively isolated, largely personal effects of the problem. Empirical evidence from a number of European countries, as well as the US and Australia shows that these effects are directly attributable to the unemployment spells themselves, rather than being driven by the same causative factors that may contribute to a person becoming unemployed.

Such evidence directly disputes the validity of the Irish Government policies that rely almost entirely on so-called 'activation programmes'. Activation programmes put in place in Ireland during this crisis primarily aim at providing disincentives for the unemployed to stay outside the labour market. Such programmes can be effective in the case where there is significant voluntary unemployment. Instead, in the environment with shortages of jobs and big mismatches between skills and jobs, policy emphasis should be on providing long-term supports to acquire necessary skills and empower unemployed to gradually transition into new professions, enterprises and self-employment.

In part, our state training programmes are falling short of closing the skills gaps that do exist in the labour markets. ICT and ICT support services training, as well as international financial services and professional services skills – including those in sales, marketing, back office operations - are barely covered by the existent programmes.

And where they are present, their quality is wanting. For a good reason: much of our training at best involves instructors who are part-time employed in the sectors of claimed expertise and are too often on the pre-retirement side of their careers, having already fallen behind the curve in terms of what is needed in the markets. In worst cases, training is supplied by those who have no proven track record in the market. Structuring of courses and programmes is done by public sector employees who have little immediate understanding of what is being demanded. We should rely less on the use of training 'specialists' and more on industry-based apprenticeships.

Many practices today substitute applied teaching in a quasi-educational programme with class-based instructions and formal qualification attainment for an hands-on, on-site engagement with actual employers. Evidence collected in Denmark during the 1990s showed that classroom-based training programmes significantly increase individual unemployment rates instead of decreasing them. The reason for this is that attainment of formal or highly specialised qualifications tends to increase individual expectations of wages offers post-programme completion, reducing the range of jobs for which they apply. This evidence in part informed the German reforms of the early 2000s that focused on on-the-job apprenticeship-based skills development. Beyond that, class-based training lacks incentives for self-advancement, such as performance bonuses and commissions.

Self-employment acts as a major springboard to new business formation and can lead to acquisition of skills necessary for full-time employment in the future. Currently, there is little training and support available for people who are considering self-employment. There are, however, strong disincentives to undertake self-employment inherent in our tax systems, access to benefits, and in reduced burden of legal compliance. One possible cross-link between self-employment training and larger enterprises' demand for contractors is not explored in the current training programmes. There are no available shared services platforms that can help self-employed and budding entrepreneurs reduce costs in the areas of accounting, legal and marketing.

Unless we are willing to sustain the indefinitely some 100,000-120,000 in long-term unemployment, we need to rethink of the entire approach to skills development, acquisition and deployment in this country.

Some recent proposals in this area include calls from the private sector employers groups to drop minimum wage. This can help, but in the current environment of constrained jobs supply, it will mean more hardship for families, in return for potentially only marginal gains in employment. Incentivising self-employment and contracting work, by reducing tax penalties will probably have a larger impact. Encouraging, supporting and incentivising real internships and apprenticeships - based on equal pay, commensurable with experience and productivity - will benefit primarily younger workers and workers with proximate skills to those currently in demand. Backing such programmes with deferred tax credits for employers, accessible after, say 3 years of employing new workers, will be a big positive.

In addition we need to review our current system of job-search assistance. For starters, this should be provided by professional placement and search firms, not by State agencies.

Finally, we need to review our current definition of the long-term unemployed to cover all those who are out of the job for longer than 6 months, as well as those who moved into unemployment fro, being self-employed.

This week, former White House economist Alan Krueger identified US long-term unemployment in the US as the "most serious problem" the economy faces right now. He is right. Yet, in the US, long-term unemployed represent roughly one third of all those receiving unemployment assistance. In Ireland, the number currently stands at almost two thirds. The crisis has not gone away. Neither should the drive for reforms.

Box-out:

With the opening of the first Bitcoin ATMs in Dublin and with growing number of companies taking payments in the world's most popular crypto currency, the crypto-currency became a flavour of the week for financial press in Ireland.

The most hotly debated financial instrument in the markets, it is generating mountains of comments, rumors, as well as serious academic, industry and policy papers. Is it a currency? A commodity, like gold - limited in supply, unlimited in demand? Or a Ponzi scheme?

Few agree as to the true nature of Bitcoin. Bank of Finland denied Bitcoin a status of money, defining it as a commodity of sorts. Norway followed the suit, while Denmark is still deliberating. Sweden classified Bitcoin as 'another asset' proximate to art and antiques, the U.S. Internal Revenue Service - as property.The European Banking Authority is clearly not a fan, having ruled that "when using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law." In contrast, German authorities recognise Bitcoin as 'a unit of account' as do the French.

Financially, Bitcoin is neither a commodity nor a currency. Bitcoin does not share in any of the main features of commodities. You can't take a physical delivery under an insured contract. You cannot use it to hedge any other asset classes, such as stocks or other currencies. And it is not a currency because it has no issuer who guarantees its value. Nor can it feasibly serve as a unit of accounting and store of value, given extreme levels of price volatility.

Thus, one of the more accurate ways is to think of Bitcoin as a very exciting, interesting (from speculative, academic and practitioner point of view) financial instrument. For now, it shares some properties common to the dot.com stocks of around 1996-1998 and Dutch tulips ca 1620-1630, the periods before the full mania hit, but already showing the signs of some excessive investor confidence. So plant your seed with care.

Disclaimer

This blog represents my personal views and is not reflective of the views or opinions held by any company, contractor, client or employer I work for currently or have worked for in the past. These views are not an endorsement to take any action in the markets or of any political position, figures or parties.

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